The digital behavioral health sector entered 2024 facing a harsh reality. After experiencing a surge in venture funding during the peak years of 2020 and 2021, the landscape has dramatically shifted, with funding amounts now lingering near the bottom of the funding cliff. This downturn is part of a larger trend of investor caution, making it harder for companies to secure the capital they need to grow. Despite this, 2024 has provided some key lessons for digital behavioral health companies striving to succeed in a more challenging financial environment. Two major takeaways have emerged: companies must focus on solving real customer problems and demonstrate the competence to achieve profitability.
As Rob Pahlavan, partner at Healthcare Foundry, put it during a panel discussion at the Behavioral Health Business’ INNOVATE conference, “You have to get back to fundamentals. You’ve got to solve the patient’s problem. You have to do it with the model that you really believe in. That’s the only way that you’re going to build a long-term and enduring company.” For Pahlavan, this emphasis on core principles is critical for startups navigating this tough market. Investors, who were once more willing to overlook inefficiencies and unproven business models in favor of rapid growth, are now scrutinizing companies more closely and looking for signs of sustainable, long-term success.
The digital behavioral health space has become increasingly crowded, with new startups and established companies alike vying for attention from investors, payers, and employers. This saturation has created a highly discerning environment, where decision-makers are only willing to invest in companies that can prove they offer something truly valuable. To succeed, companies need to demonstrate a clear return on investment (ROI), meaningful healthcare outcomes, and an ability to achieve profitability—three key factors that are essential to securing funding in this climate. Digital behavioral health funding is no longer as accessible as it once was, and companies must adapt to this new reality.
The Shift in Investor Sentiment: Resilience and Adaptability
2024’s funding climate has been one of the toughest in recent memory. Startups that were able to secure deals in previous years are now struggling to get their foot in the door. This shift in sentiment has been particularly challenging for smaller companies, which may lack the leverage or established track record to secure favorable terms with investors and business partners. However, as Natalie Schneider, CEO and founder of Fort Health, explained, the key to surviving these difficult times is resilience. “You need to have a very thick skin,” Schneider shared during a panel discussion.
Fort Health, which provides digital youth mental health services, has faced many hurdles in securing funding. But the company was able to overcome these challenges by offering a highly differentiated clinical model and a targeted go-to-market strategy through pediatricians, which has proven effective in reaching its audience. In November 2024, Fort Health raised a $5.5 million round led by venture capital firms Twelve Below and Vanterra, marking a notable achievement in a tough year for venture funding. Schneider credits Fort Health’s success to its ability to focus on solving a clear problem in the youth mental health space and developing a solution that resonates with both investors and potential customers.
The investment market in 2024 has been defined by a significant shift away from the inflated valuations and fantastical growth projections that characterized the 2020 and 2021 funding boom. Investors are now more focused on companies that have a clear path to profitability and a proven ability to deliver solid financial results. For many startups, especially those that are sub-scale and lack a proven track record, this shift has made it much more difficult to attract investment. As a result, digital behavioral health funding has become increasingly difficult to secure.
Consolidation and the Role of AI in Digital Behavioral Health
One of the major trends to watch in the digital health sector is the increasing consolidation of companies, driven in part by the funding drought. As many companies were unable to secure new series funding rounds after the 2021 peak, they have resorted to bridge financing or smaller down rounds just to stay afloat. This has created an environment where more mature digital behavioral health providers have the opportunity to consolidate the market, offering all-in-one digital health solutions and addressing the growing problem of point-solution fatigue.
The consolidation trend is also fueled by a shift in investor sentiment, with many now preferring to invest in later-stage companies that have a more established track record and a proven ability to generate returns. This has led to a “flight to quality” in the venture capital market, with investors becoming more selective about where they put their money. Companies that have managed to stay afloat in this tough environment are now better positioned to meet the growing demand for comprehensive digital health solutions that can serve the diverse needs of payers and employers.
Stephen Smith, CEO of NOCD, a digital anxiety disorder treatment provider, shared insights from his company’s experience navigating the funding challenges. NOCD, which raised $34 million in early 2023, has been able to sustain its growth by keeping its operating expenses relatively flat while continuing to innovate and expand its services. One of the key strategies that has helped NOCD maintain its growth is the development of its own AI tools. These tools have been used to automate administrative tasks, streamline workflows, and improve patient communication, allowing the company to optimize its infrastructure without the need for significant increases in headcount.
Smith is particularly excited about the potential of AI to drive the next wave of innovation in digital behavioral health. “We’ve seen what happens when you invest in optimizing different workflows,” Smith said. “You don’t need as much service to support clinicians or caregivers and patients. It’s actually a really remarkable thing.” By integrating AI into its operations, NOCD has been able to improve efficiency, reduce costs, and deliver a higher level of service to its patients—all critical factors in an increasingly competitive market. For many companies, this type of innovation is key to remaining competitive and demonstrating long-term value, which is critical for securing digital behavioral health funding.
Looking Ahead: Optimism for 2025
While 2024 has been a difficult year for digital behavioral health companies seeking funding, there are reasons to believe that the market will improve in 2025. As investors continue to retreat from inflated valuations and unrealistic growth projections, they are looking for companies that have proven their ability to solve real problems, generate meaningful outcomes, and achieve profitability. The key to success in this environment is resilience, adaptability, and a clear focus on delivering value to patients.
For digital behavioral health companies that can navigate these challenges, the future looks promising. The funding climate may improve, consolidation may create new opportunities, and advances in technology, particularly AI, will continue to transform the sector. While the road ahead may still be difficult, the companies that emerge from this tough period will be better positioned to thrive in the long term. As Rob Pahlavan said, “It can only get better from here.” In the meantime, it’s important to remember that adapting to the evolving landscape of digital behavioral health funding is a critical step toward long-term success.
